Process Costing

(Part-IV/ Chapter-4)

Dr. Asif Hasan

(Assistant Professor)
Department of Finance
IBS HYDERABAD.
 Topics to discuss

01 Meaning of Process 02 Features of Process 03 Applications of Process

Costing Costing Costing

Difference between Normal Loss, Abnormal Abnormal Gain or

04 05 06
Job costing & Process Loss Abnormal effectiveness
Costing

07 Normal Loss Vs 08 09
Abnormal Loss
 Meaning of Process Costing
• Process Cost: When the production process is such that goods are produced from a
sequence of continuous or repetitive operations or processes, the cost incurred
during a period is considered as Process Cost.

• Process Costing is employed in industries where a continuous process of

manufacturing is carried out.

• Costs are ascertained for a specified period of time by departments or process.

Chemical industries, refineries, gas and electricity generating concerns may be
quoted as examples of undertakings that employ process costing.
 Meaning of Process Costing
• Process costing refers to a cost accounting method that is used for assigning
production costs to mass-produced goods.

• Process costing is that aspect of operation costing which is used to ascertain the
cost of the product at each process or stage of manufacture.

• This method of accounting used in industries where the process of manufacture is

divided into two or more processes.

• The objective is to find out the total cost of the process and the unit cost of the
process for each and every process. Usually the industries where process costing
used are textile, oil industries, cement, pharmaceutical etc.
 Features of Process Costing

• Production is done having a continuous flow of identical products except where

plant and machinery is shut down for repairs etc.

• Clearly defined process cost centre’s and the accumulation of all costs by the cost
centre’s.

• The maintenance of accurate records of units and part units produced and cost
incurred by each process.

• The finished product of one process becomes the raw material of the next process
or operation and so on until the final product is obtained.
 Features of Process Costing

• Avoidable and unavoidable losses usually arise at different stages of

manufacturing for various reasons.

• In order to obtain accurate average costs, it is necessary to measure the production

at various stages of manufacture as all the input units may not be converted into
finished goods.

• Different products with or without by-products are simultaneously produced at

one or more stages or processes of manufacture. The valuation of by-products and
apportionment of joint cost before joint of separation is an important aspect of this
method of costing.
 Features of Process Costing
• Output is uniform and all units are exactly identical during one or more processes.
So the cost per unit of production can be ascertained only by averaging the
expenditure incurred during a particular period.
 Application of Process Costing

• The industries in which process costs may be used are many. In fact a process
costing system can usually be devised in all industries except where job, batch or
unit or operation costing is necessary. In particular, the following are examples of
industries where process costing is applied:
 Application of Process Costing
Industries Uses Process costing
Chemical works
Textile, weaving, spinning etc.
Soap making
Box making
Food products
Paper mills
Biscuit works
Oil refining
Canning factory
Coke works
Paint, ink and varnishing etc.
Milk dairy
 Difference between Job Costing and Process Costing
Job Costing Process Costing
The form of specific order costing which That form of costing which applies where standardized
applies where the work is undertaken to goods are produced and production is in continuous
customer’s special requirements. flow, the products being homogeneous.
The job is the cost unit and costs are collected
Costs are collected by process or department on time
for each job. basis and divided by output for a period to get an
average cost per unit.
Losses are generally not segregated. Normal losses are carefully predetermined and
abnormal losses are segregated.
Overheads are allocated and apportioned to Units pass through the same processes. Overheads are
cost centre's then absorbed by jobs, in apportioned to processes on some suitable basis, some
proportion to the time taken. times, pre-determined rates may be used
Joint products / By-products do not usually Joint products/By-products do arise and joint cost
arise in jobbing work. apportionment is necessary.
Standard costing is generally not suitable for The standardized nature of products and processing
jobbing work. methods lends itself to the adoption of standard costing.
 Difference between Job Costing and Process Costing
Job Costing Process Costing
Work-in-progress valuation is specific and is For WIP valuation operating costs have to be spread
obtained from analysis of outstanding jobs. over fully complete output and partially complete
products using the concept of equivalent units.
Each job is separate and independent of Products lose their individual identity as they are
others. Costs are computed when a job is manufactured in a continuous flow. Costs are calculated
complete. at the end of cost period.
There are usually no transfers from one job to Transfer of costs from one process to another is made,
another unless there is a surplus work or as the product moves from one process to another.
excess production.
There may or may not be work-in-progress at There is always some work-in-process at the beginning
the beginning or end of the accounting period. as well as at the end of the accounting period.
Proper control is comparatively difficult as Proper control is comparatively easier, as the
each product unit is different and the production is standardized and is more stable.
production is not continuous.
It requires more forms and details. It requires few forms and less details.
 Normal Process Loss
• It is the loss which is unavoidable on account of inherent nature of production
process. Such loss can be estimated in advance on the basis of past experience or
available data.

• The normal process loss is recorded only in terms of quantity and the cost per unit
of usable production is increased accordingly. Where scrap possesses some value
as a waste product or as raw material for an earlier process, the value thereof is
credited to the process account.

• This reduces the cost of normal output; process loss is shared by usable units.
 Abnormal Process Loss
• Any loss caused by unexpected or abnormal conditions such as plants breakdown,
sub-standard materials, carelessness, accident etc., or loss in excess of the margin
anticipated for normal process loss should be regarded as abnormal process loss.
The units of abnormal loss or gain are calculated as under:

• Abnormal loss (or gain) = Total Loss – Normal Loss

• The valuation of abnormal loss should be done with the help of this formula:
• Value of Abnormal Loss = (Normal Cost of Normal Output) x Units of Abnormal Loss
(Normal Output)
 Abnormal Gain
• We know that margin allowed for normal loss is an estimate, (i.e., on the basis of
expectation in process industries in normal conditions) and slight differences are
bound to occur between the actual output of a process and that anticipated.

• Thus, when actual loss in a process is smaller than that was expected, an abnormal
gain results. The value of the gain will be calculated in similar manner to an
abnormal loss.

• The Abnormal Gain Account is to be debited for the loss of income on account of
less quantity of sale of scrap available as a result of abnormal gain and Normal
Process Loss Account credited accordingly. The balance is transferred to Costing
Profit and Loss Account as abnormal gain.
 Difference between Normal Loss and Abnormal Loss
Basis For Normal Loss Abnormal Loss
Comparison
Meaning Normal Loss is a loss that takes place Abnormal Loss refers to a loss that arises
due to the inherent nature of the raw due to unexpected events like defective
materials and process of production material, carelessness, machinery
under ordinary circumstances. breakdown, etc.
Estimation It can be estimated beforehand, based It cannot be estimated beforehand.
on past experience.
Nature of loss Expected Unexpected
Realizable Value Credited to Process Account Credited to Abnormal Loss Account
Treatment of Treated as an element of the cost of It is not treated as an element of the cost
Cost of Loss production. of production.
Insurable No Yes
Value of Stock Inflated to cover the normal loss No impact on value of stock
Problem: 1 Process Costing

• A product passes through three processes. During a particular period 1,000 units
were introduced in Process A at a cost of Rs.3 per unit.
Particulars Process A Process B Process C
Materials 1000 2000 1500
Labour 3000 2000 1000
Direct Expenses 500 600 800

• Indirect expenses amount to Rs.1,500 which are to be divided on the basis of direct labour
(3:2:1).
• Ignore stock and there were no process losses.
• Prepare various process accounts.
 Solution: 1 Process ‘A’ A/c
Particular Units Amt Rs. Particular Units Amt Rs.

To Raw Materials 1000 3,000 By Transfer to Process B 1000 8250

To Materials 1,000
To Labour 3,000
To Direct Expenses 500
To Indirect Expenses 750
(1500*3/6)
1000 8,250 1000 8,250

Process ‘B’ A/c

Particular Units Amt Rs. Particular Units Amt Rs.

To Transfer from Process-A 1000 8,250 By Transfer to Process C 1000 13,350

To Materials 2,000
To Labour 2,000
To Direct Expenses 600
To Indirect Expenses 500
(1500*2/6)

1000 13,350 1000 13,350

 Solution: 1 Process ‘C’ A/c
Particular Units Amt Rs. Particular Units Amt Rs.

To Transfer from Process-B 1000 13,350 By Finished Stock A/c 1000 16,900
To Materials 1,500
To Labour 1,000
To Direct Expenses 800
To Indirect Expenses 250
(1500*1/6)

1000 16,900 1000 16,900

 Problem: 2 Process Costing
• Prepare process accounts showing the cost of the output and cost per unit at each stage of
manufacture. It may be assumed that
a.     The operations in each process are completed daily.
b.   The value at which units are to be charged to process two and process three are the cost per unit
of process one plus two respectively
Particulars Process A (₹) Process B (₹) Process C (₹)
Direct Wages 2,000 4,000 6,000
Machine Expenses 1,500 1,200 1,000
Factory Overheads 1,000 1,300 1,400
Raw Materials 5,000
Units Units Units
Production (Gross) 3,000
Waste 100 150 200
Opening Stock of Raw Material 200 300
Closing Stock of Raw Material 250 150
 Solution: 2 Process ‘A’ A/c
Particular Units Amt Rs. Particular Units Amt Rs.

To Raw Materials 3000 5,000 By Waste 100

To Direct Wages 2,000
To Machine Expenses 1,500 By Transfer to Process ‘B’ 2900 9,500
To Factory Overhead 1,000 Cost per unit = 9500/2900
= 3.275 (per unit)
3000 9,500 3000 9,500

Process ‘B’ A/c

Particular Units Amt Rs. Particular Units Amt Rs.

To Opening Stock of Raw 200 655 By Wastage 150

Material (3.275 * 200) By Closing Stock of Raw 250 819
To Transfer from Process-’A’ 2900 9,500 Material
To Direct Wages 4,000 By Transfer to Process ‘C’ 2700 15,836
To Machine Expenses 1,200 Cost per unit = 15836/2700
To Factory Overhead 1,300 = 5.865 (per unit)

3100 16,655 3100 16,655

 Solution: 2 Process ‘C’ A/c

Particular Units Amt Rs. Particular Units Amt Rs.

To Opening Stock of Raw 300 1,760 By Wastage 200

Material (5.865 * 300) By Closing Stock of Raw
To Transfer from Process-B 2700 15,836 Material (150 * 5.865) 150 880
To Direct Wages 6,000 By Transfer to Finished
To Machine Expenses 1,000 Goods A/C 2650 25,116
To Factory Overhead 1,400 Cost per unit = 25116/2650
= 9.477 (per unit)

3000 25,996 3000 25,996

 Problem: 3 Process Costing
• XYZ Ltd. manufactures a product which passes through two processes. The cost records shows the
following particulars for the month ended on 31st March 2019. Input to Process A is 30,000 Units
@ 5 per Unit.

Particulars Process A (₹) Process B (₹)

Materials 50,000 1,00,000
Labour 30,000 80,000
Expenses 20,000 20,300
Scrap Value per unit 10 20
Units Units
Normal Loss 5000 5000
Actual output 25000 20000

• You are required to prepare Process Accounts. Also show process cost per unit
for each process.
 Solution: 3 Process ‘A’ A/c
Particular Units Amt Rs. Particular Units Amt Rs.

To input to Process A 30000 1,50,000 By Normal Loss (5000 * 10) 5000 50,000
To Materials 50,000
To Labour 30,000 By Transfer to Process B A/C 25000 2,00,000
To Expenses 20,000 Cost per unit = 200000/25000
= 8 (per unit)
30000 2,50,000 30000 2,50,000

Process ‘B’ A/c

Particular Units Amt Rs. Particular Units Amt Rs.

To Transfer from Process-A 25000 2,00,000 By Normal Loss (5000 * 20) 5000 1,00,000
To Materials 1,00,000 By Transfer to Finished Goods 20,000 3,00,000
To Labour 80,000 A/C
To Expenses 20,000 Cost per unit = 300000/20000
= 15 (per unit)

25000 4,00,000 25000 4,00,000

 Solution: 4 Process ‘A’ A/c
Particular Units Amt Rs. Particular Units Amt Rs.

To Materials 10000 50,000 By Normal Loss (10000 * 5%) 500 0

To Labour 5,000 By Abnormal Loss (6.210*200) 200 1242
To Overhead 4,000
By Transfer to Process B A/C 9300 57,758
10000 59,000 10000 59,000

Process ‘B’ A/c

Particular Units Amt Rs. Particular Units Amt Rs.

To Transfer from Process-A 9300 57,758 By Normal Loss (9300 * 2%) 186 0
To Materials 6,200 By Transfer to Warehouse 9250 73,844
To Labour 4,000
To Overhead 4,800
To Abnormal Gain 136 1086
9436 73,844 9436 73,844
Solution: 4 Statement of Profit & Loss

Particular Units

Sales 8000 * 16 1,28,000

Less: Cost of Production 73,844/9,250 * 8000 = 63,865
Selling & Distribution Expenses = 16,000 79,865

48,135
 Problem: 5 Process Costing
• A product passes through two distinct processes A and B and then to finished stock. The output of
A process passes direct to B and that of B passes to finished product. From the following
information you are required to prepare process accounts.

Particulars Process A (₹) Process B (₹)

Materials Consumed 12,000 6,000
Labour 14,000 8,000
Manufacturing Expenses 4,000 4,000
Input to Process A (units) 10000
Input to Process A (value) 10000
Output (units) 9400 8300
Normal loss(% of input) 5% 10%
Value of Normal loss(per 100 units) 8 10

• No opening or closing stock is held in process

 Solution: 5 Process ‘A’ A/c
Particular Units Amt Rs. Particular Units Amt Rs.

To Input 10000 10,000 By Normal Loss (10000 * 5%) 500 40

To Materials used 12,000 By Abnormal Loss (100 * 4.21) 100 421
To Labour 14,000
To Manufacturing Expenses 4,000 By Transfer to Process B A/C 9400 39,539

10000 40,000 10000 40,000

Process ‘B’ A/c

Particular Units Amt Rs. Particular Units Amt Rs.

To Transfer from Process-A 9400 39,539 By Normal Loss (9400 * 10 %) 940 94

To Materials used 6,000 By Abnormal Loss 160 1087
To Labour 8,000
To Manufacturing Expenses 4,000 By Transfer to Finished Goods 8300 56,358

9400 57539 9400 57539

 Solution: 5 Normal Loss A/c
Particular Units Amt Rs. Particular Units Amt Rs.

To Process A A/C 500 40 By Cash A/C 1440 134

To Process B A/C 940 94
1440 134 1440 134

Abnormal Loss A/c

Particular Units Amt Rs. Particular Units Amt Rs.

To Process ‘A’ A/C 100 421 By Cash A/C (8 + 16) 260 24

To Process ‘B’ A/C 160 1087 By Closing Profit & Loss 1484
260 1,508 260 1,508

• Value of abnormal loss (Process A) = ((40,000-40)/10,000-500)*100 = 39,960/9,500*100

=421
• Value of abnormal loss (Process B) = (57539-94/9,400-940)*160 = 57,445/8,460 *160 = 1087
THANK YOU.